At Rootstrap, we regularly help founders hone the concept behind a business or mobile app, craft a strategic plan for getting the product to market, and give them the assets to raise funding for their startup through our Roadmapping workshop. Because of this, we’ve sometimes called Roadmapping an “incubator as a service.”
That label makes sense, as in some ways it serves the same function – but Roadmapping isn’t an incubator in the literal sense of the word. So what is a startup incubator? How do they work, what do they do, and why would someone want to be in a startup incubator? If you’re a founder considering entering an incubator or you just want to learn more about the startup incubator model, we can answer your questions.
What Is a Startup Incubator: A Quick Definition
A startup incubator is a lot like what it sounds like: it’s an organization that acts to nurture the growth of a young startup, providing an environment where the startup has access to resources that help it grow and develop. What a normal incubator does for eggs, a startup incubator does for companies.
Incubators usually work with startups in the very earliest stages of development. Often, a startup will join an incubator when it’s still just the founder or the founding team. The incubator provides access to a mentorship network, administrative or logistical support, office space, and a variety of other potential resources, all with the goal of helping the startup grow and succeed. Usually, incubators don’t provide much or any upfront capital. Some have likened incubators to “business school” for startups, and incubators are often funded by grants or universities, although private incubators exist as well.
Are Incubators for a Startup Industry Specific?
Some incubators specialize in working with startups from a specific industry, but not all. Some incubators will accept any startup that fits their criteria in terms of likelihood of success and where there’s a mutual benefit. It all depends on the incubator.
Often, when incubators are specific to an industry, it’s because the incubator itself is operating on a nonprofit model or with a specific mission. For example, many grant-funded or nonprofit incubators focus on education startups, edtech startups, healthcare startups, environmental startups, or other businesses focused on improving the world in some way.
That said, not all industry-specific startup incubators specialize for a socially-based reason. Sometimes, for-profit incubators specialize by industry as well. There are incubators that specialize in fintech, B2B or enterprise startups, or even on hardware startups.
So why would a startup incubator specialize by industry? In some ways, it can make the incubator more valuable to startups.
Part of the value that incubators offer startups is their network of mentors. If an incubator specializes in a specific industry, it makes it easier to hone that mentorship network to people with real, actionable experience within the industry. This can provide more specific, tangible value to founders within the incubator, and it also lets the incubator customize its programs to suit the specific needs of startups within that industry.
Still, many incubators aren’t industry-specific and will take startups from any industry. So long as they believe in the idea, the business model, and the founding team, they may accept any kind of startup.
Ideally, What Does a Startup Incubator Do for Your Business?
Now let’s get to the meat of the question: what does a startup incubator do for your business? Why would someone want to join a startup incubator?
At a high level, a startup incubator’s mission is to help participants grow and succeed in the long term. What that looks like will vary from startup to startup, but the incubator’s job is to provide the advice, mentorship, and resources to help the startup grow.
So what does that look like in practical terms? There are a number of concrete things that startup incubators do for a business.
First and foremost, startup incubators offer mentorship and advice. The incubator gives the founding team access to a network of experienced entrepreneurs who can act as mentors, provide counsel in specific situations, and give overall advice in terms of how to structure the business, how to test and develop the product, how to structure the go-to-market strategy, and any other concerns that come along the way. This advice may be very general or it may speak to very specific issues the startup is facing in the moment.
Beyond mentorship, incubators provide a number of concrete resources. One of the most common is office space. Often, incubators will provide their members with either rent-free or reduced rent office space. Most incubators provide office space using a coworking model – there’s a single, open office, and the founders and employees of all the startups in the incubator share the space to work. This model helps to lower the cost of office space by having participants share the cost of utilities. In recent years, this model has grown more popular and several companies offer coworking spaces as a standalone service – WeWork is probably the most notable.
Furthermore, incubators provide startups with a community of like minded individuals. Ask any entrepreneur – especially solo founders – and they’ll tell you that often, the early stages of founding a company are lonely and difficult. Starting a business requires countless long nights and hours of time spent working alone. Incubators provide a shared, communal workspace for their members, giving founders a community of people to interact with and work in. This community may only provide moral support, but it can also serve as an informal, peer-to-peer advice network and a chance for business connections to be made. Startups can share their respective struggles, and peers in the incubator may provide advice or be able to help through a formal business partnership.
So, on a basic level, incubators help startups grow and develop through their earliest stages. More specifically, they provide office space, resources, a community of other founders, and access to a network of experienced entrepreneurs and VCs that can help mentor and give advice to participating founders.
Ways to Pay for a Startup Incubator: Trading Equity
So now you know what startup incubators do – but how are they compensated? How does a startup incubator make money, and do startups pay for membership in an incubator?
There are several answers to this question, and different incubators each take a different approach. The most common, though, is for incubators to take an equity stake in the startups they work with.
In this model, the incubator takes a small amount of equity – usually between 5-10%, although there’s enormous variance in that number – in return for the services they offer. The incubator then makes money when the startup gets acquired. Naturally, many startups will fail and not all will grow large enough to land an acquisition, so the incubator needs to choose its members carefully to maintain a high enough percentage of participant acquisitions to stay profitable. In this model, incubators act similarly to VCs in that they “take a chance” on a large number of startups, fully understanding that many will fail. The hope is to make up for those failures with the upside of the startups that do succeed.
This is the most common model for incubators, and it’s almost ubiquitous for accelerators. We’ll cover the difference between incubators and accelerators shortly, but for now, just know that accelerators almost always take equity in their startups.
Ways to Pay for a Startup Incubator: Granting Royalties
While trading equity is the most common model for startup incubators, it’s not the only option. One other model is royalties. This is a relatively new option that hasn’t received wide adoption, but some incubators are starting to incorporate it as either a piece of the monetization puzzle or as the primary revenue model.
In this arrangement, the incubator doesn’t take equity or cash for providing their services, but instead claims a certain percentage of the startup’s future revenues as a royalty. This means that the incubator wouldn’t have any ownership stake in the company, and subsequently wouldn’t make a dime if the startup got acquired or went public. Instead, the incubator makes money purely based on the startup’s revenue flow. These types of arrangements often include a cap on royalties, past which the incubator wouldn’t take any more of the startup’s revenue.
The advantage to a royalty model is that it’s much more flexible, and even more importantly, it changes the incentive structure for both parties. One of the criticisms of the entire venture capital model is that it privileges enormous companies. Most VCs in Silicon Valley don’t invest in a company unless they see the potential for an 8-figure exit (or larger). This means they make a lot of bets on a lot of startups, pressure those startups to grow as fast as they possibly can, and while most of those companies fail, they make so much money on the ones that succeed that it doesn’t matter to them.
But here’s the thing: not all companies are meant to have an 8-figure exit. Sometimes, the market for a product or service just isn’t big enough to warrant that large of a private acquisition. This is particularly true for service companies. Does that make those companies bad? Of course not!
Plenty of entrepreneurs, especially first-time entrepreneurs, build companies that bring in “only” $1 million annual revenue or less, but that revenue is stable and they have a satisfied customer base to keep them going. There is nothing wrong with that. If a company maintains healthy revenue, supports a team of employees, and generates value in the world, well, we at Rootstrap would call that a successful company – even though it would never generate the kind of exit that VC funds look for in their investments.
And this is the rub. VCs will never support these kinds of businesses because they know they’ll never make enough money on their equity stake to make it worth it. It’s not that either party is necessarily at fault, but the traditional venture capital model simply can’t accommodate these kinds of small-but-successful companies. And to a certain extent, the same problem applies to incubators.
Granting royalties solves this problem. With a royalty model, the incubator (or investor) can make money even if the startup never gets acquired or goes public. In fact, the startup doesn’t even need to keep growing in the way that most VCs expect their investments to. With royalties, a startup could grow into a small or mid-sized company, maintain a steady revenue, and never get acquired or take on more capital. The incubator will keep getting checks so long as the startup is cash flow positive.
This is still a relatively uncommon model, and while there’s plenty to be said in its favor, the norms aren’t so clearly defined when it comes to amounts. Royalties could range anywhere from 0.5% (or even 0.1%) to 5% or more – it all depends on what the incubator is offering, how the startup values that offering, and both parties’ valuation of the startup. In some cases, incubators will combine royalties with a traditional equity stake – for example, taking a 4% equity stake and 2.5% of revenue in royalties, often with a cap on the royalties. It all depends on what makes sense to the two parties.
Ways to Pay for a Startup Incubator: Flat Rate Fees
Finally, there’s one last model used to pay for incubators: a flat rate fee.
This is probably the simplest of all three options. In this model, the incubator simply charges a fixed price for services rendered. This is almost always a monthly fee, but could conceivably be a one-time payment for a certain block of time.
The flat rate fee is also probably the least common of the three options. More frequently, an incubator will charge a flat fee in addition to taking equity or royalties (or both), but reduce the equity stake or royalty percentage in return for the flat fee. 500 Startups, one of the foremost accelerators in the world, operates on a model where they take a flat fee, but they take that fee out of a larger investment they make in the company.
Startup Incubator Vs Accelerator: A Question of Structure
Now, the question you’ve been dying to answer: what’s the difference between a startup incubator and a startup accelerator?
On one level, incubators and accelerators do very similar things. They both work with early-stage startups and provide them with resources and access to mentor networks to help them grow. But the specific form that the support takes, as well as the type of companies that they work with, varies between incubators and accelerators.
Generally, incubators work with younger companies and are often less aggressive regarding growth. Incubators may even work with a founder before they have much more than an idea – in many cases, part of the point of the incubator is to pivot the product until the startup achieves product-market fit. This is also why we liken our Roadmapping service more to incubators than accelerators – often, Roadmapping demonstrates that their isn’t a place in the market for the idea and the founder needs to pivot. The same thing can happen in an incubator.
As for what incubators provide, the offering usually centers around mentorship and guidance. Incubators usually also offer office space on a coworking model, and most will provide legal counsel. Some provide capital, but this is usually less important with incubators – the main support comes in the guidance and mentorship, as well as access to a network of VCs.
While for-profit incubators are common, many incubators don’t run on a for-profit model. Some incubators operate through grants, while others operate through Universities or non-profit institutions. This is in keeping with the general focus on mentorship and development instead of massive, fast growth.
A startup accelerator, on the other hand, is much more focused on growth. In fact, the two names explain the difference well: incubators work with companies while they’re still very young or even theoretical, giving them the supportive environment they need mature and stand on two legs. Accelerators usually work with companies that already have some traction or progress under their belt, and the goal is to put the startup’s growth into overdrive.
In a sense, incubators help a startup “hatch” out of the egg of an idea, whereas accelerators help an existing startup accelerate their growth and scale the company. Some have likened incubators to the ‘childhood’ of a startup, while accelerators help take a startup from adolescence to adulthood.
This means that to participate in an accelerator program, startups already have their founding team and may even have early employees. They have a minimum viable product (MVP) at the very least, and many startups will have well-defined, user-tested products when they join accelerators. Some startups may even be producing significant revenue. They come to the accelerator to take the company they’ve already gotten moving and make it scale.
To that end, the structure and function of an accelerator differ from an incubator. For starters, virtually all accelerators provide capital in exchange for equity – this model is almost ubiquitous. Some accelerators also charge a fee, but virtually all take equity in the companies they work with.
Accelerators also provide access to a mentorship network, but usually this mentorship is geared more towards the specific problems of how to help the company through its current obstacles and less towards general entrepreneurial advice. Accelerators may offer office space, but many do not.
Accelerators will often place much more value on providing their members access to venture capital funding, as well. Many accelerators work on a model where participants have a certain amount of time in the accelerator, and at the end of the program, startups do a “demo day” where they pitch their company to investors.
Generally speaking, accelerators are also much more focused on fast growth. The engagement is almost always limited to a specific time frame, usually 3-6 months. During that time, they expect participants to grow – fast.
Just how fast depends on the accelerator, but the number can be eye-popping. For startups in Y Combinator, one of the leading accelerators in the world, a good growth rate is roughly 5-7% per week, with some companies growing upwards of 10% per week.
That may not sound like a lot, but let’s put it in perspective. If your company starts out making $1,000 per week, it starts with an annual revenue of $52,000. Once we deduct expenses, that’s not even enough to pay the founder’s salary.
But if your company grows 10% per week, the second week it makes $1,100. The fifth week, it makes roughly $1,349. Doesn’t sound like a lot, does it? But if we keep that growth going, by the end of a year, your company makes $181,272 per week – which means annualized revenues of over $9 million. After three years of 10% growth, your company would have annualized revenues of more than $300 billion.
Obviously, this isn’t a realistic level of growth for three years. But part of the purpose of an accelerator is to help startups achieve unrealistic growth for a brief, intense period of time. It’s a way to “skip” some of the growing period and scale at a much faster rate.
Startup Incubators and Accelerators: An Example of a Startup Incubator
So, what’s an example of a good incubator?
One example is the incubator program at the University of Southern California. The USC Incubator typifies incubators in that it takes a slower, more careful approach to working with startups. They allow startups to stay in the program for up to one year, and they take a very accepting stance to pivots, finding other cofounders, and the often nonlinear course that idea-stage companies often take.
The USC Incubator is, obviously, supported by the university, so it runs on a non-profit model. They do not charge a fee and do not take equity. While they don’t provide capital outright, they can help set teams up with grants, stipends, access to resources, or outside investors.
Startup Incubators and Accelerators: An Example of a Startup Accelerator
Perhaps the best example of a startup accelerator is also the most well-known: Y Combinator. YC is one of the oldest accelerators in the game, and one of the organizations that helped to found the accelerator model. They’re also one of the most successful accelerators in the world, having worked with household names like Dropbox, Airbnb, Stripe, and Reddit – and the combined valuation of all YC alumni exceeds $80 billion. Like many accelerators, Y Combinator is a private company seeking to make a profit off of its program. YC offers seed funding, advice, access to a network of mentors and investors in exchange for a 7% equity stake.
YC also expects their investments to grow – fast. As we discussed earlier, the average growth rate for YC companies is around 5-7% per week. This is a much larger expectation than the one placed on participants in USC’s incubator program.
How to Tell If the Startup Incubator Business Model Is Right for Your Company
So, now you may be asking yourself: should I join an incubator? Is an incubator right for my startup?
An incubator might be right for you if you’re still in the very early stages of your startup. At this point, you may or may not have an MVP, and you probably don’t have traction. Your startup may still be just an idea, and you may want to join an incubator to help turn that idea into a reality. You may also be looking for other founding team members through the incubator.
Chiefly, you should join an incubator if you’re interested in getting your company ready for growth. The incubator can help you take a loose idea and whittle it into something that’s primed to acquire customers and grow.
How to Tell If the Startup Accelerator Business Model Is Right for Your Company
You may also be asking yourself: should I join a startup accelerator? Is an accelerator right for my company?
This question is a little trickier, because getting it wrong can genuinely pose a danger to your company. Entering an accelerator program too early can put an enormous amount of pressure on you to grow the company before it’s ready to grow – and trying to grow when you still haven’t found the right product offering can easily kill the company.
You should join an accelerator only if you have a startup that’s doing relatively well. You should have some cash flow, a product, and a basic level of product-market fit. The accelerator can help you put your fledgling company into overdrive and reach the next level.
Essentially, you should join an accelerator only if you want to scale your company. Incubators help prepare you for growth, but accelerators help you do that growing.
A Startup Incubator Do’s List: What to Look for When Selecting an Incubator
So let’s say you do decide to join an incubator. What should you look for? How do you tell good incubators from bad ones?
Ultimately, this question can only be answered on a case-by-case basis. But here are a few of the most important things to keep in mind:
- Make sure the incubator has a network of mentors that are relevant to you. This means they should be entrepreneurs, and ideally entrepreneurs with experience in your space.
- Ensure the incubator is offering the things that are important to you. If office space matters, make sure they have it, but don’t stress over that if it’s not important. The same goes for capital – it can make sense to join an incubator that doesn’t provide capital if your startup isn’t pressed for (or ready for) cash.
- Finally, think long and hard about the financial structure. It’s all too easy to give away equity in the initial stages, and often, one or two additional points don’t seem like that much. Down the line, though, that one percentage point could equate to millions of dollars. Make sure that what you’re getting is worth what you’re giving up.
A Startup Incubator Dont’s List: What to Look Out for When Selecting an Incubator
Another important thing is to look for any startup incubator red flags. While it’s not always easy to see them, it’s vital to do your due diligence and look for anything that raises suspicion. Here are a few things to watch out for:
- First of all, as we said, think long and hard about the financial structure. Early-stage founders, especially first-time entrepreneurs, are often far too lax about giving away equity – and if an incubator asks for a lot without providing all that much in return, it’s something to be mindful of.
- Watch out for any complex contracts with binding clauses. Once you exit the incubator, you shouldn’t owe them anything beyond the previously agreed equity or royalty points. If they’re looking for more than that, it’s a red flag.
- Finally, check their track record. An incubator may offer great resources, a solid financial structure, and plenty of jazzy marketing copy, but if they can’t point to a concrete track record of successful companies, they’re probably not worth your time.
How to Find a Startup Incubator Near You
So how can you find a startup incubator? One option is to simply Google incubators in your city. Incubators have exploded over the past several years, and there are many more than the name-brand programs. Many small cities have local incubator programs, and in addition to being accessible, these are often much more affordably priced than more well-known incubators.
If you’re a student, check to see if your school has any kind of incubation program. This may be a full-service incubator or something more like informal support, but either can prove helpful in the early stages of your startup.
And as always, don’t forget to look through your network. Reach out to people you know who work in the business, tech, or financial world and ask them if they know of any reputable incubator programs you could apply to. Even if they aren’t familiar, see if they can connect you with someone who is. Never forget the strength of weak ties.
That said, we don’t want to leave you on your own in the hunt. We’ve collected a few great incubators in some of the biggest tech hotspots in the nation.
Industry Hotspots: Startup Incubators in NYC
Looking for startup incubators in NYC? Here’s our pick of some of the best:
- 1776: This incubator targets startups entering highly regulated fields like medicine or education. They work to help entrepreneurs grow their companies in concert with institutions, providing a perfect launching pad for truly “big idea” startups.
- Founder Institute: This incubator focuses on founders instead of startups – in fact, you don’t need an idea to apply. Instead, the focus is on finding a need in the marketplace and designing a company to fill that need.
- In-Residence: In-Residence is facilitated by J.P. Morgan, and it gives participants access to the internal business units, technology, and data of J.P. Morgan. While focused on banking startups, it’s a powerful resource for financial startups.
- Made in NY: The Made in NY Media Center is more of a co-working space than an incubator, but their highest pricing tier ($450/month) offers office hours with industry experts, making it similar to an incubator.
- ValueStream: ValueStream focuses on companies using big data to solve enterprise-level business problems, with a particular focus on financial services.
Industry Hotspots: Startup Incubators in Boston
- Greentown Labs: Greentown bills itself as the “largest cleantech startup incubator in the United States” – pretty self-explanatory! They focus on hardware startups solving problems in clean energy.
- Mansfield Bio-Incubator: Unsurprisingly, this incubator focuses on startups in the biotech, pharmaceutical, life sciences, and medical devices industries. They offer office space equipped with biotech equipment, making it easy for founders to access otherwise- cost-prohibitive facilities.
- ACTION: ACTION is technically a network of business incubators in the Northeast, but it’s a great resource to find startup incubators in Boston.
Industry Hotspots: Startup Incubators in the Bay Area
- Matter: Matter offers a 20-week program focused on entrepreneurship in the media space. They provide support for prototyping and encourage founders to “fail as fast as you can.”
- i/o Ventures: With alumni including Mint, TechCrunch, and YouTube, i/o Ventures has an impressive track record. And with a focus on mentorship, it’s an ideal environment for early-stage founders.
- Founders Space: Founders Space runs programs in Silicon Valley, San Francisco, and China, giving them an impressive network. Their alumni include household names like Instagram, Etsy, and TaskRabbit.
A Startup Accelerator Do’s List: What to Look for When Selecting an Accelerator
Now we’ve gone in-depth on startup incubators – but what about accelerators? Here are some of the main things to look for when selecting a startup accelerator:
- While capital isn’t always a concern for incubators, it usually is for accelerators. You need your company to grow as fast as possible – and you probably need investment to make that happen.
- Make sure that the specific program, offerings, and framework of the accelerator makes sense for what your company needs at its current stage. Do you need office space, or can you do without it? What kind of resources are you looking to gain access to? Doing your research now to see if there’s a fit will pay off down the line.
- As always, look at the track record. You should only join a startup accelerator if they have a solid track record of successful companies that are at least tangentially similar to yours.
A Startup Accelerator Don’ts List: What to Look out for When Selecting an Accelerator
And of course, you’ll need to watch out for any startup accelerator red flags. Keep all of these things in mind when choosing an accelerator:
- Similar to incubators, you’ll need to be mindful of terms and conditions. Watch out for any complicated contracts that bind your startup to the accelerator after the program has ended.
- While capital is important, make sure you’re getting more than just cash. If the mentor and VC network of the accelerator doesn’t suit your company, be weary.
- Perhaps most importantly, make sure that your company is ready for the accelerator. You’ll need to grow fast once you’re in – and you should never join a startup accelerator before you’re ready.
How to Find a Startup Accelerator Near You
The process of finding an accelerator is similar to that of finding an incubator – but accelerators are generally a little easier to find, simply because there are more of them.
As always, a Google search is the first (and sometimes the best) place to look for an accelerator. Be sure to check your local area, as there are many local accelerator programs outside of the larger names.
AngelList is a great resource. As we said earlier, check out their list of startup accelerators for a comprehensive collection.
And finally – as always – use your personal network. Reach out to anyone you know with business experience and ask if they have recommendations for good accelerator programs, or if they can connect you with someone who might.
Industry Hotspots: Startup Accelerators in NYC
If you’re working on a startup in New York City, you’ll find plenty of startup accelerators in the big apple. Here are a few of our recommendations:
- AngelPad: Voted best accelerator by MIT for the past 3 years running, AngelPad is a little different from most accelerators – instead of taking on a lot of companies and offering a little capital, they offer a lot of capital to a few companies. While they run an extremely selective program, for startups that get in, the rewards are quite high.
- Techstars: One of the most well-known tech accelerators, Techstars is a global network with a star-studded list of alumni. They invest $120K in their accelerator participants and provide access to a vast network of mentors.
- Barclays Accelerator: Barclays runs a fintech-focused accelerator in New York, but also hosts accelerators in London and Tel Aviv. They offer co-working spaces, a global network, and access to expert mentors. If your startup solves financial problems using technology, this accelerator may be perfect for you.
Industry Hotspots: Startup Accelerators in Boston
- Masschallenge: Masschallenge boasts a very attractive model for founders. As a non-profit accelerator, they take no equity – but they focus on socially-minded ventures. This makes them excellent for entrepreneurs looking to solve the world’s problems.
- LearnLaunch: LearnLaunch caters to education-based startups, specifically focusing on edtech.
- Bolt: Bolt focuses on hardware startups, and they offer participants well-equipped prototyping shops as well as a full-time engineering staff. This makes it the perfect place to perfect a disruptive hardware product in almost any industry.
- RevUp Capital: RevUp is unique in that they focus on acceleration through revenue instead of capital. While they provide up to $75K in funding, they take a 4-8% royalty on revenue for the first three years after the program instead of equity.
Industry Hotspots: Startup Accelerators in the Bay Area
With Silicon Valley a stone’s throw away, the San Francisco Bay Area is one of the world’s most active hotbeds for startups and accelerators. Here are a few of the best startup accelerators in San Francisco:
- Y Combinator: YC was one of the first companies to pursue the accelerator model, and they’re still one of the biggest players in the game. YC invests $120,000 in participants and provides access to a legendary network of mentors and alumni. But with a 3-month timeline, the program moves fast – so be ready to grow or die.
- 500 Startups: Another one of the biggest accelerators around, 500 Startups has helped to develop more than 1,600 startups to date. Their program lasts 4 months and offers $150,000 in capital, office space, and mentorship in exchange for a 6% equity stake.
- Rockstart Accelerator: Rockstart offers a longer timeline than most startups, giving founders 150 to 180 days in the program.
- The Brandery: The Brandery offers a creative branding agency in addition to an accelerator program, making it excellent for startups with a great idea that aren’t sure how to take it to market.
Accelerator and incubator programs can be truly transformative for startups – but they don’t make sense for everyone. If you’re looking for another option to hone your idea for a digital product without giving away equity, our Roadmapping workshop is a powerful one. To date, Roadmapping alumni have raised an aggregate $500 million in capital across more than 500 successful launches.
Want to learn more? Drop us a line.